Commercial Umbrella Insurance helps to protect your business from the financial risk of large lawsuits against your company. It is a form of liability insurance that covers your business when your general liability, auto liability, or other coverages are not sufficient to pay for damages. Although large judgments are rare, they can be financially ruinous for your business, and umbrella insurance provides a relatively affordable way to reduce this risk.
Umbrella insurance, also called excess liability insurance, supplements the liability coverage provided by your primary liability insurance policy. Most umbrella policies require that you have underlying insurance coverages in force, such as general liability. Additionally, depending on the nature of your business, commercial auto liability, workers’ compensation, or employer practices liability may also be required.
If your primary insurance limits are exceeded due to an accident or large judgment against your company, umbrella insurance would pay the remainder of the claim, up to the limit of coverage for the umbrella policy. For example, if your general liability insurance has a limit of $1 million, and you carry $10 million of umbrella insurance, in the event of a $3 million settlement, the general liability insurance would pay $1 million, and your umbrella policy would pay $2 million. If you did not have umbrella insurance, your business would be responsible for paying the additional $2 million.
Umbrella insurance is a cost effective way to add to your insurance coverage, as the premiums on umbrella insurance are usually lower per additional dollar of coverage than the premiums on your primary policies. The reason for the lower premiums are that the umbrella policy does not pay out until your primary insurance policy is fully exhausted.
What does Umbrella Insurance Cover?
Your primary insurance policies provide coverage for certain types of liability, such as general liability, auto liability, workers’ compensation, or employer practices liability. Umbrella insurance covers the same types of liability, and increases the coverage to a higher dollar amount. If your underlying coverage is ever exhausted due to a large settlement or multiple claims in a policy year, then the umbrella policy will cover the rest, up to the coverage limit for the umbrella policy. Additionally, umbrella insurance, in conjunction with your primary insurer, may cover parts or all of your legal defense fees in the event your company is sued.
Types of liability risks that umbrella insurance covers include:
- A customer slips and falls on a wet floor, and requires long-term medical care as well as compensation for not being able to work at their high-paying job.
- A delivery driver at your company accidentally runs a red light, causing a crash that injures multiple people and results in extensive property damage.
- A supplier is visiting your production site and is injured by a forklift driver who doesn’t see him.
- Your product has a manufacturing defect and seriously injures multiple customers.
- Your business operations cause a fire that spreads to a neighboring building, destroying their valuable inventory and equipment.
Typical umbrella insurance policies do not cover Professional Liability. To cover professional liability, you may need Errors & Omissions Insurance.
Who needs Umbrella Insurance?
Umbrella insurance is appropriate for:
- Businesses that own substantial assets that they wish to protect in the event of a lawsuit.
- Companies that have high-risk exposures, such as high net-worth clients, or where employee injuries are more likely should consider buying umbrella insurance.
- Retail storefront businesses that are open to the public should buy umbrella insurance. The more interactions with members of the public that your business has, the more likely you will have exposure to an incident that creates liability.
- Your company involves deliveries or requires a lot of driving. Car and truck crashes are a common source of liability claims.
How does Umbrella Insurance work?
In order to purchase umbrella insurance, your business will be required to purchase primary liability insurance policies such as general liability and auto liability. It is common for umbrella insurance companies to require coverage of $1 million in your primary liability insurance policies. If your business is found liable for a loss, your primary insurance will pay up to the coverage limits on the primary policy. If the judgment exceeds the limit of liability, then your umbrella insurance will pay the rest of the loss up to the the limit of the umbrella insurance coverage limit.
Your business has general liability coverage of $1 million, and umbrella coverage of $5 million.
A customer is injured on your property after tripping and falling while visiting your business, and requires long-term medical care. The customer sues you and is awarded a judgment of $1.8 million.
The general liability insurance would cover the first $1 million of the judgment and the umbrella insurance would cover the remaining $800,000. Without umbrella insurance, your business would be responsible for paying the $800,000 that exceeds the $1 million limit of your general liability coverage.
Your business has auto insurance coverage with a combined single limit of $1 million, and umbrella coverage of $5 million.
One of your delivery drivers in involved in a crash and is determined to be at fault. Multiple people are injured in the crash, and there is also extensive property damage. The sum of the damages and medical care for the injured total $1.4 million.
The auto insurance covers the first $1 million of damages, and the umbrella insurance covers the remaining $400,000.
Your business has general liability coverage of $1 million, and umbrella coverage of $5 million.
Your business creates a new logo without realizing that another company in the same industry has already copyrighted a similar logo. The other company sues your company and wins $2 million in damages.
The general liability coverage would cover the first $1 million of damages, and your umbrella insurance would cover the remaining $1 million.
How much Umbrella Insurance should I buy?
Umbrella insurance is sold in increments of $1 million. The amount of umbrella insurance to buy is ultimately a business decision, as it is not possible to have total foresight into all possible risks that a business may face. However, to properly estimate the amount of umbrella insurance to buy, you should consider the risk exposures that are common to your industry.
For example, if you operate a jewelry store that caters to high net worth clients, you may want to purchase coverage sufficient to cover a high net worth person slipping and falling. Your company might be liable for lost wages for the customer until they are able to return to work in addition to any long-term medical care necessary to treat the fall. If you consider the amount of damages from this type of risk as well as other typical risks your business may face, you can estimate the appropriate amount of insurance to buy.
On the other hand, if your company is a wholesale company with most work conducted in a warehouse without heavy equipment or hazardous substances, and not a lot of customer foot traffic, you may not need as much coverage as a retail store.
What do I need to apply for an Umbrella Insurance Quote?
In order to get an accurate quote for an umbrella insurance policy, you should provide the following information to the insurance company or your broker:
- Basic financial information and details about your business operations.
- Copies of your existing general liability, auto liability and any other liability insurance policies your company carries. These may include employee practices liability, liquor liability, errors & omissions insurance or professional liability.
- Information about any insurance losses or claims your business may have sustained in the past.
- A biography of the company’s officers and owners showing their titles and experience.
- Annual payroll information along with number of full-time and part-time employees and contractors.
Sometimes, an umbrella policy may provide broader coverage or contain less exclusions than a primary policy. In the event that a loss is excluded or not covered by a primary policy, but where the loss is covered by the umbrella policy, the umbrella policy may provide coverage starting from the first dollar of the loss without relying upon the underlying primary policy. This is called “drop-down” coverage. Like primary insurance policies, this coverage may be subject to a deductible.
Most umbrella insurance contracts allow the insurer to participate in, or take over the legal defense of any claim that may involve the insurance company. If the primary insurance company does not want to appeal in the event of a judgment that exceeds the coverage provided by your primary insurance, your umbrella insurance company may reserve the right to appeal the judgment.
Umbrella insurance also covers legal fees that you may incur while defending or settling your lawsuit. Some policies include legal fees within the limits of coverage, while other policies do not include them. For example, if you have an umbrella policy with a coverage limit of $5 million that includes legal fees, and you have a judgment of $4.5 million and legal fees of $1 million, the policy will pay $5 million, and your business will be responsible for the additional $500,000. However, if your umbrella policy excludes legal fees from the limit of coverage, the policy will pay the judgment of $4.5 million, plus the legal fees of $1 million.
Multiple Claims in a Policy Year
If you have multiple claims in a policy year, the umbrella policy will pay up to the coverage limit for the year. For example, if your umbrella policy is $5 million, and you have two separate losses within the same policy year of $3 million and $4 million, the most that the umbrella policy will pay is $5 million.
Typical umbrella policies will contain certain exclusions. Common exclusions include:
- Aircraft and Watercraft
- Data breaches and Hacking
- Product Recalls
Umbrella policies also usually exclude punitive damages and personal liability claims. It is important to consult your policy or broker for details on policy exclusions. Many provisions of umbrella insurance are negotiable with the insurer on a case-by-case basis, and insurers will adjust their quoted premium based upon negotiated changes in the insurance contract.